During the low-interest-rate era following the 2008 Great Financial Crisis, yield-starved fixed-income investors looked beyond government securities and corporate bonds to the world of private credit, which now approaches $1.8 trillion in assets under management across an array of subsectors.
We explore the private-credit landscape and highlight a handful of key themes we believe investors should consider:
- Quality bias: As below-trend growth and higher rates threaten to expose cracks in weaker balance sheets, we believe providers of private credit should strive to stay high in the capital structure while focusing on quality companies in defensive sectors with the potential to generate strong near-term cash flow.
- Liquidity support: Lack of liquidity hasn’t squeezed all sectors equally, but some have really felt the pinch. For example, plenty of private-equity-backed companies faced a funding gap in 2022 as capital markets shut down and banks were stuck with hung deals. Sensing opportunity, private providers of junior credit jumped into the gap, offering investors what we believe are handsome yields at attractive terms.
- Inflation protection: As elevated prices threaten to apply further economic pressure, we believe asset-based lending has the potential to provide a partial hedge against inflation because the collateral backing the loans can also rise in value. In this paper, we zoom in on two sectors of particular interest: residential real estate debt and asset-backed loans.
- Flexibility premium: While whipping economic cross-currents could lead to greater dispersion within and across asset classes, we believe nimble investors can capture a “flexibility premium” by casting a wider net across income-producing subsectors and skillfully pivoting among them to maximize risk-adjusted returns.